September / October 2008
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Yet even as this huge wave of inflation bears down on us, governments so far seem little motivated to protect against it. So you’re pretty much on your own to take care of your financial survival.
The situation is even worse than just having runaway inflation. It’s coming while we’re in a recession in the U.S. that is having an impact in other countries. No growth or negative growth in tandem with hyperinflation hits us in the gut with the double whammy of stagflation. That makes it all the more urgent to convert your depreciating cash into assets that will gain value as fast or faster than onrushing inflation Your survival kit should naturally include gold. The reason is fairly obvious. Inflation by definition means a dollar buys less. Historically, it’s virtually an unwritten law of economics that gold and the dollar are mirror images. When the dollar is weak, gold is strong. So as inflation saps the dollar’s strength, gold gains power.
Having lived (suffered is more like it) through the horrific stagflation of the ‘70s, I can’t stress enough how urgent it is for you to act now, right now, to protect yourself and your family wealth from the financial devastation to come. Typically along about now gold rouses from its summer doldrums full of energy and raring to climb higher. If normal cycles hold true, this is the time to get on board if you aren’t already, or add more gold if you don’t have enough. Just look what happened last year…gold took off at the end of August and raced from $650 to $1,000 by March of this year.
I’m not an alarmist by nature. I generally regard the doom and gloom prophets with a sizeable dose of skepticism (though lately they’ve been more right than wrong). But the imminent threat of surging, relentless inflation is so dangerous that I’m compelled to sound the alarm loud and clear for all to hear. Let me spell out for you the grim facts that have me so concerned…
DOUBLE-DIGIT INFLATION IS ALREADY HERE!!
| Ronald Reagan described inflation as being “as violent as a mugger, as frightening as an armed robber and as deadly as a hit-man.” The Economist cautions that “Until recently, central bankers thought that this thug had been locked up for life. Thanks to sound monetary policies, inflation worldwide had stayed low in recent years. But the mugger is back on the prowl.” According to projections by The Economist, “Double-digit price rises are about to afflict two thirds of the world's population.” Emerging economies have been hardest hit because of their booming economies, but rich countries are feeling the pain, too. In emerging countries like China, India, Indonesia, and Saudi Arabia, prices have surged 8-10% over the past year. China’s inflation has been heating up at the highest rate in 12 years, hitting nearly 9% overall. Food costs have jumped more than 23%, with vegetables up 46% and pork, a favorite on the Chinese menu, leaping over 63%! In Russia, consumers pay more than 14%higher prices than a year ago. Shoppers in Argentina are getting socked with 23% inflation. In Venezuela – Hugo Chavez’ “socialist paradise” – inflation races higher at a whopping 29%! In the inflation cesspool of Zimbabwe, the government recently lopped off 10 zeros from its currency, turning 10 billion dollars into one dollar overnight (a clumsy sleight-of-hand trick that doesn’t make the root causes of inflation disappear). Although U.S. inflation is officially reported to be hovering around 4%, you and I know the “headline” CPI (Consumer Price Index) numbers are as fishy as a tuna cannery because of all the stuff they DON’T count that we still have to pay for. |
The developed world suffers a bit different kind of pain - stagflation. Though the inflation rates in rich countries aren’t as bad as the emerging economies are experiencing (yet), the pain of inflation is every bit as acute because of sagging economies.
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The average price of a loaf of bread has climbed 32% since January 2005. Just over the past year, a carton of eggs has zoomed almost 50%. Staples like ground beef, milk, chicken, apples, tomatoes, lettuce, coffee and orange juice come much dearer these days, and food costs will continue to shoot higher as long as the ethanol farce continues to divert food to fuel. Since 2005, wheat prices have exploded five-fold. Soybean prices have tripled.
Over the last six years, oil prices have skyrocketed nearly five-fold driving gasoline to record highs. And it isn’t just motorists who are feeling the sting at the pump. Airlines are laying off people right and left, cutting back on flights, hiking fares, and tacking on extra charges for things that used to be free – like checked bags. For example, Continental is cutting 3,000 jobs and 11% of capacity. American Airlines has reduced its domestic capacity by 12% and charges $15 for the first bag checked for each passenger. United Airlines announced it also will stick passengers with an extra $15 charge for checking a bag. Every $1 increase in oil prices adds $465 million to U.S. airline operating costs. Experts estimate that when oil reaches $200, airlines will be shelling out $70 billion on fuel. Even the military is feeling the pinch, in France at least. For the first time ever, the French navy canceled three missions planned for summer because of soaring fuel prices.
Don’t expect any consistent long term relief anytime soon. The Energy Department says gasoline prices will hang around $4 a gallon and oil above $100 barrel at least through the end of 2009, according to Guy Caruso, head of the department’s Energy Information Administration.
Now, so far I’m talking only about inflation in the cost of goods we buy at the grocery store, service station, and the shopping mall. That doesn’t even begin to account for all the other influences that wind up indirectly costing us more these days, things the government conveniently leaves out of its calculations of our cost of living. The U.S. has become a predominantly service economy more than a manufacturing economy (we’ve farmed out a large part of the manufacturing offshore to emerging countries). The cost of service is rising, too, because of other inflationary forces in play that are not so easy to see.
Even if the CPI wasn’t so misleading, it’s only a thin slice of our actual cost of living. A Rai University analysis identifies eight kinds of inflationary influences we have to contend with: credit inflation, deficit inflation, scarcity inflation, profit inflation, trade inflation, tax inflation, cost-push inflation, and demand-pull inflation.
Add these inflationary drivers to gushing liquidity from the government in the form of interest rate cuts, money supply, bailout money and tax rebates, and is obvious that we’re all going to get a big bite out of our budgets from runaway inflation.
WHY DOESN’T THE FED DO SOMETHING ABOUT INFLATION?
The most obvious weapons the Fed has in its arsenal to fight inflation are raising interest rates aggressively and shutting off the money supply. That’s how then-Fed chairman Paul Volcker squelched the double-digit hyperinflation of the ‘70s and ‘80s. Volcker’s draconian tactics caused a lot of pain and raised a ruckus of protesting howls. But his method worked. Vilified at the time, he’s now hailed by many economists as a brilliant hero for making the hard decisions and taking the courageous, if unpopular, steps necessary to straighten out the mess.
But Ben Bernanke is no Paul Volcker. Before he was confirmed by Congress as chairman of the Fed, Ben Bernanke was tagged as being soft on inflation, an inflation dove. In direct contrast to his predecessor Alan Greenspan (The Great Caped Crusader against inflation) and in stark contrast to Volcker, Bernanke’s pet bugaboo has always been DEFLATION. He’s obsessed with the Great Depression. His fear and loathing of deflation led to his infamous “helicopter drop” speech on the power of the printing press (to print money by the bushel and drop it from helicopters) to fight against declining prices. It was Helicopter Ben, as he’s now often called by his critics, who primed the pump for the runaway inflation we’re seeing now, by slashing interest rates and opening the liquidity floodgates full blast to ward off deflation when the credit crisis knocked the economy into recession. Yet he seems completely oblivious to his own contribution to resurrecting the specter of inflation, which had been thought forever contained over the long reign of Volcker and Greenspan. He appears almost baffled at how prices are rising sharply when the economy is going nowhere and seems to have no inkling that he had a big hand in forcing up prices.
There are rebels in the Fed that dissent from the do-nothing course Bernanke has taken on inflation. Fed presidents Richard Fisher (Dallas), Charles Plosser (Philadelphia), Gary Stern (Minneapolis), and Thomas Hoenig (Kansas) have expressed worries about surging inflation. But the dissenting votes are still in the minority.
Even then, there’s a force beyond the control of the Fed that it can do little about – global inflation in emerging markets.
WHY INFLATION WILL GET WORSE
Even if the Fed had the guts to take strong action against inflation – and there’s little indication it does – it may have little to say about one of the most powerful inflationary forces on the loose in the world today. A huge swell of inflation from distant shores generates waves of inflation that are spreading across the global markets. The crests of these waves tower higher with each successive onslaught, building toward an inflation tsunami that will inevitably come crashing into the U.S. economy.
While the U.S. wallows in an economic bog unable to find traction, emerging markets like Brazil, Russia, India, and China – the so-called BRIC countries – boom with prosperity. And they’re not the only ones. Much of Southeast Asia bustles with vigorous economic growth, including Vietnam, Thailand, Malaysia, Indonesia, Taiwan, and South Korea. Turkey and the United Arab Emirates [UAE] hum with economic growth in the Middle East. Even some areas of the former Soviet Union in Eastern Europe enjoy bright prospects; though they’re not yet a major factor in global inflation, in the decade ahead their influence is likely to be felt much more. The impact of the emerging market boom on global inflation comes in two forms. One is the voracious demand of these countries for materials to modernize their infrastructure, their factories, and their products.
That means a whole slew of new competitors to the U.S. and Europe for supplies of oil, coal, iron, steel, copper, nickel, cement, timber, glass, and all the other raw materials it takes to build and run a modern country.
Second is the rapidly rising growth of consumerism as the fast-growing populations of formerly backward countries now have newfound means to afford a better lifestyle than they once knew.
They can eat better (and more), dress better, live in nicer homes, and buy cars (which they are doing by the millions every day). They not only produce a lot of the goods we buy in our stores but now they can buy these things for themselves – modern kitchen appliances, big screen TVs, electronic gadgets, designer jeans, iPods and MP3 players. That means billions more consumers wanting to buy billions more goods.
The outlook for these rising star countries looks strong for at least a decade and likely beyond. In contrast to an earthquake-spawned tsunami in the ocean, which wreaks havoc in a short period and then is over except for dealing with the horrendous aftermath, the inflation tsunami is setting up to be a chronic repeater that could last for 15 or 20 years.
WHAT YOU SHOULD DO TO PROTECT YOUR WEALTH
Where can you put your money
to keep it safe from the inflation tsunami
that’s heading our way?
The government protects your money in a bank, so you could keep it safely in cash…that is, if you don’t mind losing money. If you had done that seven years ago, the money you deposited in 2001 (at the dollar’s last peak) would now be worth about 30% less in world currency terms. Your wealth would have been eroding at the rate of 4.3% every year. In gold terms, your loss would have been even worse, since the dollar is now worth more than 70% less in gold terms than in 2001. That’s a loss of over 10% a year! How about stocks, a mutual fund, 401(k), IRA? After all, even with the volatility of the past year, the Dow still managed to reach an all-time high. Or did it? If you count the Dow’s value in dollars, yes it did. But if you measure the Dow in terms of gold, the stock market is in one honking bad bear market.
Let’s go back to 2001 again. The Dow was around 11,000 and gold was trading at $255 an ounce. It would have cost you $11,000 to buy one share of the Dow…or you could have bought 42.8 ounces of gold. If you held on to it from then until now, at recent prices your one share of the Dow would now be worth a little more than $12,000 – an unimpressive gain of 9% in seven years! That works out to about 1.3% a year. BUT, those dollars your stocks represent would have lost value at the rate of 4.3%, which means that in real terms you’d actually have been losing about 3% a year on your stocks. If you sold your one share of the Dow today to buy gold, you could only get 13.3 ounces for your money. In gold terms, you would have lost more than 68% of your wealth.
Taking an average official inflation rate of 3% for the seven-year period from2001 to today, gold has outrun inflation by more than 10-to-1!
I’m not a gambling man, but if I were, I’d say those are pretty convincing odds.
Now, we know that past performance doesn’t predict what will happen in the future. I say that to you all the time to remind you – and me – that lots of things can happen to change the course of the markets, and they seem to be happening much more frequently these days.
Say inflation reaches double-digits, like 10% to be on the conservative side, and gold maintains its 10:1 inflation advantage. That implies a 100% per year gain in gold prices…doubling your money every year, in other words. This is an entirely plausible prospect. Gold prices nearly doubled in 2005 and again in 2007 during times when inflation was said to be relatively tame. When the hyperinflation wave hits, 100% annual gains for gold should be not only possible but is seen by many as a likely scenario.
Naturally there are going to be the inevitable corrections and setbacks along the way like we’ve experienced this summer. And each time, I have no doubt, inevitably the talking heads will pronounce the gold bull to be deceased. But they’ve been wrong for seven years, and I see no evidence to indicate they’ve gotten any smarter in the meantime.
If and when the Fed wakes up and starts raising interest rates, the dollar bulls will most certainly rejoice with a greenback rally that puts a dent in gold prices for awhile (since the dollar and gold usually move in opposite directions). But the Fed will probably be so far behind the inflation curve at that point that gold should easily outrun both the rates and the buck over an extended period of time. Besides, raising interest rates doesn’t clean up the rot underneath the dollar – gushing money supply, massive federal budget deficit, staggering trade deficit, war and floods of bailout doles from Washington. Bandaids won’t fix that.
I know it has been hard sometimes over the past year to make sense of gold’s price movements. They’ve zigged when they should have zagged or did nothing when they should have made huge leaps. There’s no logic to what has been going on in the gold markets, nor in financial markets in general. That’s because these are not rational, logical markets. They are driven purely by emotion – fear and greed – not by good sense.
Exactly when reason and logic will return to the markets, I couldn’t say. Who can tell when a madman will regain his senses? All the more motivation, then, to protect your wealth with a real asset whose values has stood the test of time for more than 5,000 years. For five millennia, gold has historically maintained, on average, a constant value in buying power regardless of how the value has been expressed.
I don’t by any means suggest that you put all your eggs in a gold basket. It’s never a good idea to concentrate all your wealth in one type of asset. I strongly urge you, though, to consider the risks of keeping most of your money in cash or stocks or other assets that are depreciated rapidly by runaway inflation. It’s simply prudent to buy yourself enough wealth insurance – in the form of gold – to protect your nest egg.
I recommend at least 10% of your investment portfolio should be in gold…20% is even better for many, but rarely more than that. How much of your assets you allocate to gold depends entirely on your own personal financial circumstances and goals.
But whatever your strategy with regard to gold, I urge you to make your decisions and take action right away to adjust your gold holdings as you see fit. Whether the usual post-summer surge for gold follows typical patterns in this decidedly non-typical year remains to be seen. But the odds – and fundamentals – favor sticking to the script of history.
It’s okay to own some “paper” gold, either shares of a gold exchange-traded fund (ETF) or of gold mining stocks. However, you always have to remember with such assets is that they are, after all, nothing but paper. You don’t actually hold in your hand something of real value.
Rare gold coins, on the other hand, give you something real, something tangible to own that you can know for an absolute certainty is yours to keep. Rare gold coins are nobody’s liability, nobody’s debt, nobody’s promise to pay. Rare gold coins are actual wealth in, of, and by themselves with no strings attached.
In recent summer months, rare gold coins have taken a healthy pause during the season dealer’s typically take vacations. However, from the reports I’m getting in talking to coin dealers across the country, that pause may be coming to an end as so often happens in the fall when dealers return from their summer vacations. If you’re planning to buy more rare gold coins, I suggest you do it now. Rare coins could become more expensive in the months to come.
